The Kresge Foundation Works to Reinvigorate the Housing Market through Detroit Home Mortgage

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The Kresge Foundation Works to Reinvigorate the Housing Market through Detroit Home Mortgage

Since its founding in 1924, the Kresge Foundation has made a special effort to advance the quality of life of the residents of its home city of Detroit. The foundation’s commitment, showcased in the 2006 establishment of the Detroit Program, remained unwavering in the wake of the city’s 2013 bankruptcy. That same year, Mayor Mike Duggan identified the lack of mortgage lending as the biggest problem facing the city. Because housing values had fallen precipitously during the 2008 real estate market crash, many Detroit residents had been left underwater on their mortgages, owing more for their homes than they were now worth on the market. Because banks would not finance new mortgages large enough for these properties to exchange hands, owners could not sell their homes, and buyers were left with no option but to pay cash to complete the sale. These circumstances further depressed the housing market, and in 2014, only 450 home mortgages were issued in the entire city. In 2016, the Kresge Foundation and several public- and private-sector organizations created the Detroit Home Mortgage (DHM) program to facilitate the issuance of mortgages and reinvigorate the city’s stalled housing market. The Kresge Foundation and its partners received a 2017 HUD Secretary’s Award for Public-Philanthropic Partnerships — Housing and Community Development in Action for DHM’s role in reviving Detroit’s housing market.

Relaunching the Mortgage Market

DHM addresses Detroit’s lack of mortgage lending directly by facilitating the issuance of two mortgages. The first mortgage covers 96.5 percent of the appraised value of the house, and the second mortgage covers the difference between the sales price and appraised value, up to $75,000. Mortgages are available in 10-, 15-, and 20-year terms. DHM guarantees both mortgages to reduce the risk of default and foreclosure on the loans for the originating banks. The loan guarantees are crucial to the program’s success; although the first mortgage is backed by the property itself, the second mortgage is for more than the value of the property and therefore is unlikely to be recouped through sale in the event of default and foreclosure.

Prospective homebuyers can use DHM to buy a move-in ready house or to buy a house and finance necessary repairs. Existing homeowners can also use the program to refinance their mortgage when they undertake repairs. Eligible borrowers are intended or current owner-occupants who have adequate income, a minimum credit score of 600, and the necessary downpayment for purchase. Eligible properties are one- to four-unit houses located in the city. For multiunit properties, the borrower must occupy one of the units, and the other units may be rented out.

Borrowers are required to take a minimum of two educational courses: a HUD-approved homebuying course and a class on the risks and benefits of high combined loan-to-value mortgages. Borrowers who plan to renovate their home are also required to take an additional 45-minute renovation training class and are given access to one of DHM’s 5 construction project managers. The project manager evaluates the feasibility of the renovation, advises the client, and checks on the project once a month.

DHM is administered by the Minneapolis-based Community Reinvestment Fund, USA (CRF), a nonprofit community financial institution that joined the program’s planning effort in 2015. For each loan originated through the program, CRF earns an administrative fee, which in combination with grants, helps fund DHM’s operations. Five local banks have provided mortgages through DHM: Chemical Bank, Liberty Bank, Independent Bank, Flagstar Bank, and Huntington Bank. The Kresge Foundation issued $1 million in grants to support CRF’s administrative work when the program launched. The foundation also helps fund DHM’s loan guarantee program, including a $6 million contribution, the program’s largest. The Ford Foundation and the Michigan State Housing Development Authority also support the loan guarantees, and the state authority also provides funding to reduce mortgage interest rates for low- and moderate-income homebuyers. As of late 2018, DHM’s loan guarantees totaled $120 million, with $40 million guaranteeing second mortgages.

The Outcomes to Date

DHM was initially launched as a three-year program with an end date of February 2019. However, CRF program director Krysta Pate reports that DHM was so effective that the program partners decided to extend the program. In DHM’s first year, the number of mortgages issued in Detroit increased by 25 percent, and DHM claims credit for one-third of that increase. In the two years since its launch, DHM financed 7 percent of all mortgaged sales in Detroit. By late 2018, the program had originated 120 mortgages. The program also assisted 71 clients who initiated the mortgage process with DHM but switched after learning that they were eligible for a conventional product. At the end of that year, 46 percent of new DHM borrowers were renovating homes, and 54 percent were purchasing homes. Pate explains that the proportions of renovators and buyers have fluctuated with market changes, with up to 80 percent of borrowers renovating in the early days of the program. During the same period, 75 percent of clients who received a DHM mortgage were moving from elsewhere within the city, and nearly 25 percent were relocating to Detroit from surrounding suburbs; approximately 3 percent of borrowers moved from outside of Michigan.

Going forward, the DHM partners plan to target specific neighborhoods where mortgaged purchases are slower and softer than elsewhere in Detroit. “Up until now it’s been a very buyer-motivated program, where buyers decide what neighborhoods to go into,” explains Pate. “We want to focus on strengthening neighborhoods that have not yet seen much recovery.” This new geographic focus is not anticipated to involve changes to DHM’s mortgage process or product.

Restoring the Housing Market

The Kresge Foundation and CRF are also taking steps to address two other problems in Detroit’s housing market. With the market’s rebound, the city does not have enough move-in-ready homes to meet the demand. To increase the number of available houses, the DHM partners launched the Detroit Home Mortgage Developer Line of Credit Pilot in December 2017, in which minority property investors engaged in renovating dilapidated homes for sale can access a $1 million line of credit. In its first year, the pilot funded approximately $2 million worth of renovations. The partners are also interested in improving the operating capabilities of Detroit’s housing nonprofits, which were hit hard by the economic recession. With these proposed initiatives complementing DHM’s existing efforts, the Kresge Foundation and its partners are helping to revive the city’s housing market and improve Detroit residents’ quality of life.